Press Releases
Mellon Equity Reverses Outlook: Growth Stocks will Now Lead Market
—Group's call for value stocks was correct in 2004—
PITTSBURGH, February 14, 2005 — Growth stocks are expected to outperform value stocks in the large-cap equity market in early 2005, according to a style-allocation model recently developed by Mellon Equity Associates. This is a change from the model's outlook last year. The model was developed in 2004 and correctly predicted that value stocks would outperform growth stocks between April 2004 and the end of the year. During that period, the Russell 1000 Value index surged 13.1% versus a 5.5% gain for the Russell 1000 Growth benchmark.
"Early this year, our model concluded that market conditions changed," said William P. Rydell, president of Mellon Equity. "We're now expecting growth stocks to lead the large-cap equity universe. We believe that the ability to determine the correct style, growth versus value, will become an important tool for those seeking to add alpha, or the capability to outperform a benchmark." Mellon Equity uses price-to-book ratios and other measures consistent with the leading benchmarks to segregate stocks into either a growth or value category.
In deciding whether to favor growth or value stocks, the Mellon Equity model analyzes interest rate spreads, the term structure of interest rates, and several valuation and profitability indicators for baskets of stocks of both investment styles. "We are now able to identify the combinations of variables that are favorable or unfavorable to growth and value stocks, " Rydell added.
Mellon Equity reached its conclusion that growth stocks will lead the market in early 2005 after examining simulated portfolios over a 26-year period, ending in December 2004. The additional alpha, or ability to outperform a benchmark, depends on the degree to which value stocks are overweighted or underweighted. Looking at a typical equity portfolio comprising 50% value stocks and 50% growth stocks, Rydell said, "Varying the value portion of the portfolio between 25% and 75% would increase the annual return by nearly 1¾ percent."
Mellon Equity Associates, a subsidiary of Mellon Financial Corporation, is a specialist in active U.S. equity and balanced fund management. It aims to maximize returns through a blend of quantitative and qualitative techniques. Its portfolios are customized to reflect the risk tolerance of its clients. The portfolios can be individually designed to outperform any benchmark, as well as for specific needs, such as socially responsible investing. Mellon Equity has approximately
Mellon Financial Corporation is a global financial services company. Headquartered in Pittsburgh, Mellon is one of the world's leading providers of financial services for institutions, corporations and high net worth individuals, providing institutional asset management, mutual funds, private wealth management, asset servicing, human resources and investor solutions, and treasury services. Mellon has approximately